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Rating Action:

Moody's affirms Children's Hospital Los Angeles' (CA) Baa2; outlook remains positive

15 Sep 2020

New York, September 15, 2020 -- Moody's Investors Service has affirmed the Baa2 assigned to Children's Hospital Los Angeles, CA (CHLA), affecting approximately $440 million of rated debt issued by the California Health Facilities Financing Authority. The outlook remains positive.

RATINGS RATIONALE

Affirmation of CHLA's Baa2 reflects the organization's important role as a provider of a range of pediatric services in the Los Angeles market ranging from primary care to very complex care. These strengths are balanced against a very challenging payor mix and extensive reliance on the California provider fee program to generate positive cash flow, and modest balance sheet metrics compared to peer organizations.

The most immediate social risk is the impact of COVID-19, which has resulted in weaker volume and short-term revenue challenges. Though the organization's relief funding from the CARES Act have helped to offset margin pressures in fiscal 2020 and 2021, a high degree of uncertainty still remains around the longer term potential impact of COVID-19 including when patient volume will return to pre-COVID-19 levels. We regard the coronavirus outbreak as a social risk under our Environmental Social and Governance (ESG) framework, given the substantial implications for public health and safety.

RATING OUTLOOK

Maintenance of the positive outlook acknowledges progress the organization has made in several long term goals including broadening its network of care, increasing the number of patients seen, and improvement in key balance sheet metrics. However, uncertainty created by the coronavirus pandemic and the negative impact it has had on patient volume in recent months remains a risk. We expect CHLA will continue to generate favorable margins inclusive of provider fee and CARES Act funding over the next year.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Return of volume lost due to coronavirus that leads to resumption of normal levels of service

- Maintenance of strong margins, inclusive of provider fee funds

- Continued improvement in balance sheet measures, particularly days cash and unrestricted cash to debt

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Inability to return to pre-coronavirus levels of financial performance or sustained contraction in patient volumes

- Material delay or reduction in funding available to CHLA in approval of next provider fee round

- Material weakening of pre-provider fee margins

LEGAL SECURITY

Bonds are secured by a gross revenue pledge. There is also a mortgage on CHLA's primary acute care facilities that will remain in place so long as the Series 2012A bonds are outstanding. Once the Series 2012A bonds have been defeased, the mortgage pledge will be removed. There is a debt service coverage test of 1.1x (consultant call in); 1.0x (event of default).

PROFILE

CHLA is a nationally recognized pediatric academic medical center, providing high acuity care across a range of specialties, conducting significant research, and operating numerous residency and training programs. It is affiliated with the Keck School of Medicine of the University of Southern California.

METHODOLOGY

The principal methodology used in these ratings was Not-For-Profit Healthcare published in December 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1154632. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Daniel Steingart
Lead Analyst
PF Healthcare
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Eugene Spielman
Additional Contact
PF Healthcare
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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